Investors continue to display a growing uneasiness with hedge funds. The latest example: A new survey from Ernst & Young found that just 13 percent of institutional investors plan to increase their allocation to traditional hedge funds in the next three years. This is down from 17 percent last year and 20 percent in 2012.
“Investors that are decreasing allocations say they are de-risking and eliminating high fees,” the report states. Many of those disenchanted investors are investing in other products offered by hedge fund managers, EY adds. What’s more, of those investors that are interested in maintaining their allocation or increasing it, 40 percent say they face obstacles such as allocating too much to a single asset class, according to the report. “These results would suggest that, on a net basis, allocations are not increasing to hedge funds from institutional investors,” EY concludes.
How are managers responding? Some of offering more flexible ways to invest, such as separately managed accounts, long-only funds or cross-selling new products to their traditional customers. “As such, the industry has begun to see inflows from a new investor base — private wealth platforms — and is developing registered products to attract a retail audience,” EY points out.
In fact 56 percent to 57 percent of funds with $2 billion or more under management are offering separate accounts, compared with just 42 percent of funds with less than $2 billion. And 46 percent of funds with more than $10 billion are offering long-only funds, compared with 36 percent of those with less than 2 billion under management and just 26 percent of funds with $2 billion to $10 billion.
“In the future, the largest opportunity for hedge fund managers may be in long-only funds,” EY states in the report. “However, they will face stiff competition from the traditional asset managers that have historically operated in this space.”
Finally, whereas 54 percent of the largest funds — those over $10 billion — have developed registered liquid funds (including so-called UCITS funds, which are essentially mutual funds in the UK and Europe that can employ alternative strategies), just 31 percent of the mid-sized funds have entered this market and only 29 percent of those with under $2 billion.
___
Morgan Stanley has initiated coverage of hedge fund favorites Facebook, Google and Twitter. The investment bank says these three companies account for 70 percent of total advertising growth in 2014 and 60 percent of U.S. online advertising revenue. However, of the three, the only one it recommends is Facebook.
“The most powerful growth trend in advertising is the global growth in smartphone penetration,” the bank explains in a research note. “This growth is driving up mobile time spent, content consumption, and commerce, all of which drives significant growth in ad impressions.”
It prefers Facebook, citing these factors, plus its valuation and the bank’s confidence in the company achieving its estimate. It assigned the stock an Overweight rating and $90 price target. The stock closed Monday at $73.88, down about 1.5 percent. The other two stocks are rated Equal Weight.
___
More bad news for Tiger Cub White Elm Capital Partners and other hedge funds that held on to their investments in Ocwen Financial, the controversial mortgage servicer. On Monday investment bank Barclays cut its target price on the stock to $20 from $30, citing lower earnings expectations. “After the most recent accusation by the New York Department of Financial Services, we believe that intensified regulatory scrutiny will likely yield higher compliance costs that pressure margins while also restricting servicing transfers,” it tells clients in a note. It also maintained its Equal Weight rating on the stock.
___
New York-based BlueMountain Capital Management disclosed that it owns 10.4 percent of DryShips, an Athens-based dry bulk shipping company.
___
Shares of Herbalife fell around 12 percent or so in after hours trading after the controversial multilevel marketer of nutrition supplements reported third quarter revenues and earnings that were below analyst estimates. The stock had closed up about 6.56 percent in the regular session Monday.
___
Stephen Mandel Jr.’s Lone Pine Capital disclosed that it owns nearly 12 million shares of Autodesk, or 5.3 percent of the total outstanding. The Greenwich, Connecticut-based hedge fund firm did not own any shares of the software company at the end of the second quarter. We won’t know for another two weeks or so whether it owned shares of the company in the third quarter.
